Western  Insurance  Review. 

ST-  L0UIS-  MO.,  FROM  JANUARY  NUMBER,  ,8;,. 

THE  C°-°PERAT1VE  DELUSIONS. 


Opinions  of  Aug.  F.  Harvey ,  Esq. 


Opinion  of  Flon.  Wm.  Barnes. 


The  Valuation  of  Cooperative  Certificates. 


The  Status  of  a  Cooperative  Company. 


The  Companies  to  be  excluded  from  Missouri. 

In  the  following  opinions  addressed  to  Hon.  Wyllys  King, 
Superintendent  of  the  Insurance  Department,  by  Aug.  F.  Har¬ 
vey,  the  Department  Actuary,  and  Hon.  Wm.  Barnes,  late 
Superintendent  of  the  New  York  Insurance  Department,  there 
is  some  diversity  of  opinion  ;  the  first  regarding  a  cooperative 
certificate  as  of  no  lower  grade  than  that  of  an  ordinary  life 
policy,  and  the  other  regarding  it  as  of  the  status  of  a 
paid-up  life  policy,  for  at  least  $1,000.  Each,  however,  shows 
that  no  continuous  reserve  can  possibly  be  maintained,  upon 
either  grade,  under  the  company’s  system  of  premium  pay¬ 
ments. 

In  his  second  paper,  Mr.  Harvey  having  proposed  the  mode 
of  valuation,  only  in  view  of  a  cooperative  company  actually 
doing  business  here,  gives  reasons  for  excluding  all  such  com¬ 
panies  from  the  State ;  and  we  are  informed  that  his  views, 
corroborated  by  other  testimony,  will,  doubtless  be  adopted  by 
the  superintendent,  and  that  henceforth  cooperative  companies 
will  be  denied  participation  in  the  insurance  business  of  the 
State. 

Mr.  Harvey  shows  that  the  foundation  of  cooperative  busi¬ 
ness  is,  like  the  latest  definition  of  a  novel,  a  something 
“founded  upon  facts  invented  for  the  purpose;”  and  in  this 
view  coincides  with  Hon.  Elizur  Wright,  who  declines  to 
“solve  a  problem  in  which  all  the  quantities  are  unknown  and 
variable.  ” 

St.  Louis,  December,  1870. 

Hon.  Wyllys  King,  Superintendent : 

Sir  :  In  the  matter  of  the  mode  of  valuation  of  the  certifi¬ 
cates  of  membership  in  the  National  Life  Insurance  Company 
of  Chicago,  I  have  the  honor  of  saying  that  I  have  given  the 
subject  the  fullest  consideration  that  the  papers  and  points 
presented  me  permit. 


The  law  of  Missouri,  regulating  the  business  of  life  insurance 
companies  within  the  State,  prescribes  that  whenever  a  com¬ 
pany  shall  file  certain  statements,  pay  certain  fees,  and  pro¬ 
duce  evidence  that  it  has  $roo,ooo  deposited  with  State 
authorities  for  the  benefit  of  its  policyholders,  it  shall  be  per- 
;  mitted  to  do  business  in  the  State.  These  requirements  have 
have  been  complied  with  by  the  National  of  Chicago. 

The  law  further  provides,  for  the  purpose  of  verification  of 
the  statement  of  assets  and  liabilities,  for  an  examination  of 
the  items  composing  the  one;  and  a  calculation  of  the  company’s 
reinsurance  reserve.,  or  computation  of  the  .present  liability  of 
the  company  upon  each  of  its  policies—  in  detail  or  by  groups— 
which  should  appear  as  an  item  on  the  other  side.  For  the 
purpose  of  valuation,  the  law  adopts,  for  the  department  stand¬ 
ard,  the  American  Experience  Rate  of  Mortality,  with  4 1/2  per 
cent,  interest,  and  directs  that  in  all  cases  computations  shall 
be  made  upon  net  premiums  only. 

The  question  first  to  be  decided  is,  to  what  class  of  assurance 
policies — whether  term,  life,  endowment  or  other — can  the 
certificates  of  the  National  be  properly  assigned  ?  That  answer¬ 
ed,  the  proper  tables  of  net  rates  is  made  apparent.  The  par¬ 
ticular  policies — or  certificates  of  membership — issued  by  the 
National  of  Chicago  are  upon  what  is  popularly  called  the 
cooperative  plan,  and  are  held  by  the  company  to  be  merely 
policies  of  temporary  insurance  for  one  year,  in  the  sum  of  not 
less  than  $1,000,  with  permissive  clauses  under  which  the 
insured  can  convert  them  at  the  end  of  the  year  into  regular 
life  or  endowment  policies,  or  extend  their  temporary  tenure 
indefinitely  year  by  year.  Let  us  see  if  this  view  is  eorrect. 
First,  as  to  the  inducements  held  out  by  the  company  to  ob¬ 
tain  applications.  It  says  “insurance,  divested  of  actuarial 
mysteries  is  furnished  each  year  at  its  naked  cost,”  and  then 
follows  its 


TERMS  OF  MEMBERSHIP. 

One  membership . $9.00 

Annual  dues,  two  dollars  on  each  $1,000,  in  advance. . . .  5.00 
Which  on  the  death  of  a  member  in  a  full  series, 
will  secure  to  the  person  named  in  the  certificate 

the  sum  of . 2,500.00 

Two  memberships,  on  one  certificate, .  23.00 

Annual  dues,  in  advance, .  10.00 

Which  on  the  death,  See.,  secures,  &c., . 5,000.00 

Three  memberships .  ’  ^  OQ 

Annual  dues,  & c., .  15.00 

Which  secures  as  above . 7,500.00 


2 


January ,  1 87 1 


WESTERN  INSURANCE  REVIEW. 


Four  memberships .  $45.00 

Annual  dues .  20.00 

Which  secures  as  above . 10,000.00 


Assessments,  in  the  event  of  the  death  of  a  member,  on  each 
membership  held  by  you,  on  each  membership  held  by  the 
deceased  member  in  your  series,  $1.10. 

GUARANTEE. 

“This  company  guarantees  to  the  insured  in  the  event  of 
death,  on  each  membership  held  by  him  or  her,  as  many  dol¬ 
lars  as  there  are  memberships  in  his  or  her  series  at  time  of 
death  ;  and  that  the  said  amounts  shall  exceed  all  the  moneys 
which  shall  have  been  paid  to  the  company  on  his  or  her  cer¬ 
tificate.  And  it  further  agrees,  for  the  space  of  one  year  from 
the  date  of  the  certificate,  that  the  number  ot  memberships 
shall  not  be  less  than  one  thousand,  thereby  securing  the  in¬ 
sured,  in  case  of  death  within  one  year,  the  sum  ot  one  thou¬ 
sand  dollars,  and  such  further  amount  as  the  number  of  mem¬ 
berships  exceed  one  thousand. 

“You  are,  by  the  company,  placed  in  a  class  limited  to 
twenty-five  hundred  memberships,  near  your  own  age,  in  order 
that  the  deaths  may  be  justly  apportioned. 

“Said  divisions  (classes)  are  divided  off  as  follows  : 

Division  A  comprises  persons  in  good  health,  of  both  sexes, 
between  the  ages  of  10  and  25  years. 

Division  B***,  those  between  25  and  35  years. 

Division  C***,  those  between  35  and  45  years. 

Division  D***,  those  between  45  and  60  years. 

“In  each  division  there  are  series,  each  series  limited  to 
2,500  memberships. 

“When  one  series  is  full,  another  will  be  commenced,  to  be 
known  as  series  No.  2,  in  same  division. 

“The  divisions  only  designate  the  age  of  the  persons. 

“Should  a  vacancy  occur  by  death  or  otherwise,  it  will  be 
immediately  filled  by  a  new  applicant  of  the  proper  age,  so 
that  a  series  once  full  will  be  kept  full. 

“Whenever  a  member  insured  in  your  series  dies,  and  satis¬ 
factory  proof  of  lbss  has  been  received  at  the  home  office  at 
Chicago,  you  are  notified  by  the  company  of  such  death,  and 
the  number  of  memberships  held  by  said  member.  You  are 
to  pay,  or  cause  to  be  paid,  at  the  home  office  at  Chicago,  on 
each  membership  held  by  you,  within  thirty  days  after  the 
mailing  of  said  notice,  the  sum  of  $1.10  on  each  membership 
held  by  the  deceased  member ;  one  dollar  collected  on  each 
membership  will  be  paid  over  to  the  person  named  in  the  cer¬ 
tificate  of  membership,  and  the  ten  cents  will  be  used  to  cover 
postage  and  other  expenses  of  collecting.” 

The  probable  (or  possible)  number  during  the  year  of  these 
death  assessments  is  variously  stated,  from  none  at  all  to  six 
per  thousand  of  memberships;  and  in  money,  from  no  dollars 
to  fourteen,  and  is  based  upon  tables  purporting  to  give  the 
experienced  rate  of  mortality  of  companies  doing  business  in 
New  York  from  i860  to  1869 — the  results  of  which  are  not 
assisted  to  credibility  by  even  the  facts  there  given.  This 
much  presents  the  salient  points  of  the  canvassing  document 
of  the  company,  to  wit:  That  for  a  payment  in  hand  of  $12.00, 
a  regular  annual  payment  of  $5.00 — specified  to  be  for  annual 
expenses — and  an  irregular  payment  of  $1.10  whenever  death 
occurs  in  the  class  to  which  the  certificate-holder  belongs,  he 
is  promised  an  insurance  of  as  many  dollars  as  there  are 
memberships  in  his  class,  up  to  2,500,  and  for  one  year  not 
less  than  1,000. 

SECOND — OF  THE  APPLICATION. 

This  is  in  the  ordinary  form.  It  requires  answers  by  the  ap¬ 
plicant  to  certain  questions  touching  his  or  her  physical  con¬ 
dition,  habits,  &c.,  and  provides  for  a  regular  medical  examin¬ 
ation.  At  the  foot  of  the  personal  interrogatories,  there  is  a 
declaration  stipulating  that  the  preceding  replies  are  all  true, 
that  no  material  fact  has  been  kept  from  the  knowledge  of  the 
company,  and  that  “any  omission  or  neglect  to  pay  any  of 
the  dues  or  assessments  on  or  before  the  days  on  which  they 
shall  fall  due  shall  take  place,  that  then,  in  either  event,  this 


contract  shall  become  null  and  void,  and  all  moneys  which 
shall  have  been  paid  shall  be  forfeited  to  the  said  company, 
for  its  sole  use  and  benefit.”  Then  follows  date  and  applicant’s 
and  witnesses’  signatures. 

There  is  no  material  difference,  if  any,  between  this  form  of 
of  application  and  that  in  general  use  by  life  insurance 
companies. 

THIRD — OF  THE  CERTIFICATE  OF  MEMBERSHIP. 

This  document  is,  in  full,  in  the  following  words  : 

This  Certificate  of  Membership  witnesseth  that  the 
National  Life  Insurance  Company  of  Chicago ,  in  considera¬ 
tion  of  the  representations  made  to  them  in  the  application  for 

this  certificate,  and  of  the  sum  of - dollars,  to  them  duly 

paid  by  — - ,  and  of  the  annual  sum  of  five  dollars 

on  each  membership  held  by - to  be  paid  to  said  company 

on  or  before  the  first  day  of -  in  each  and  every  year 

during  the  continuance  of  this  certificate,  have  constituted 

- 1 - — ,  of - ,  county  of - ,  State  of - ,  a 

member,  with - membership  in  the  National  Life  Insurance 

Company  of  Chicago,  subject  to  its  charter  and  by-laws,  and 
conditions,  and  agreements  hereinafter  mentioned.  Within 
sixtv  days  after  due  notice  and  satisfactory  proof  of  the  death  of 

the  said - ,  has  been  received  at  the  home  office 

of  the  company  at  Chicago,  the  National  Life  Insurance 

Company  hereby  promises  and  agrees  to  pay  to - 

or - legal  representatives,  at  the  office  of  the  company  in 

Chicago,  Illinois,  as  many  dollars  on  each  membership  held 

by - as  there  are  memberships  in  division - ,  series - , 

of  this  company,  at  the  time  of  death  of  the  said - . 

And  the  company  hereby  guarantees  that  for  the  space  of 
one  year  from  the  date  of  this  certificate,  the  number  of  mem¬ 
berships,  on  said  division  and  series,  shall  not  be  less  than  one 
thousand,  thereby  securing,  in  case  of  death,  one  thousand 
dollars  on  each  membership,  and  such  further  amount  as  the 
number  of  memberships  may  exceed  one  thousand.  The 
number  of  memberships  in  said  division  and  series,  after  the 
death  of  a  member,  shall  be  ascertained  according  to  the  con¬ 
ditions  hereinafter  expressed. 

This  certificate  is  issued  and  accepted  by  the  above  named 
member,  upon  the  following  express  conditions  and  agree¬ 
ments  : 

1 .  The  above  named  member  hereby  agrees  to  forward  to 

this  company,  the  annual  sum  of  two  dollars  on  each  member¬ 
ship  in - name,  on  or  before  the  first  day  of— — —  in  each 

and  every  year,  during  the  continuance  of  this  certificate,  and 
the  said  member  further  agrees  that  if  the  said  annual  dues  of 

two  dollars  on  each  membership  held  by - is  not  received  by 

the  company  at  the  home  office  in  Chicago  at  the  date  when 
due,  or  within  thirty  days  thereafter,  then — membership  shall 
cease,  and  this  certificate,  with  all  its  agreements  and  guarantees 
shall  be  null  and  void  and  of  no  effect. 

2.  The  above  named  member  further  agrees  to  pay - to 

the  company  for  each  and  every  membership  held  by - the 

sum  of  one  dollar  and  ten  cents  for  each  and  every  member¬ 
ship  held  by  a  deceased  member  in  his  or  her  division.  Said 
payment  to  be  made  within  thirty  days  from  the  date  when  the 

company  shall  mail - a  notice  of  the  death  of  a  member 

and  the  number  of  memberships  held  by  said  deceased  mem¬ 
ber.  And  the  said  member  further  agrees  that  if  the  said  as¬ 
sessment  or  assessments  shall  not  be  received  by  the  said  com¬ 
pany  at  the  home  office  in  Chicago,  within  thirty  days  from  the 

date  of  said  notice,  then - membership  shall  cease,  and  this 

certificate  with  all  its  agreements  and  guarantees  shall  be  null 
and  of  no  effect. 

3.  A  printed  or  written  notice  from  the  secretary,  directed 
to  the  address  of  each  and  every  member,  as  it  appears  in  the 
application  or  on  the  books  of  the  company,  and  deposited  in 
the  post-office,  shall  be  deemed  a  legal  notice.  In  order  to 
ascertain  the  number  of  memberships  in  any  division  or  series 
on  the  death  of  any  member  belonging  to  such  division  and 
series,  the  memberships  in  the  name  of  those  members  who 
shall  have  refused  or  neglected  to  pay  their  annual  dues  at  the 
time  above  specified,  without  further  notice  and  also  assess¬ 
ments  on  previous  death,  after  due  notice  given  them  accord¬ 
ing  to  the  conditions  of  membership,  shall  first  be  stricken 


} 

I 

January ,  1871  WESTERN  INSURANCE  REVIEW. 


from  the  list  of  memberships  in  each  division  and  series,  and 
shall  not  be  counted. 

4.  Due  notice  must  be  given  to  the  secretary  of  the  company 
by  each  and  every  member  of  all  changes  of  his  or  her  residence, 
post-office  address,  occupation  or  name. 

5.  If  the  said  assured  shall,  without  the  consent  of  this  com¬ 
pany  previously  obtained  in  writing,  engage  as  a  mariner, 
engineer,  fireman,  conductor,  or  laborer  in  any  capacity,  on 
any  sea,  sound,  inlet,  river,  lake  or  railroad,  or  in  the  manfac- 
ture  of  gun-powder,  fireworks,  or  in  sub-marine  operations,  or 
coal  mining,  or  shall  be  personally  engaged  in  the  production 
or  transportation  of  highly  inflammable  or  explosive  substance, 
or  engaged  in  any  extra-hazardous  occupation,  or  enter  any 
military  or  naval  service  whatever  (except  the  militia  when  not 
in  actual  service,)  or  shall  die  in  consequence  of  a  duel,  or  of 
the  violation  of  the  laws  (civil  or  military)  of  any  nation,  State 
or  province,  or  shall  become  so  far  intemperate  as  to  seriously 
or  permanently  impair  his  or  her  health  or  produce  delerium 
tramuns,  or  in  case  the  answers  or  declarations  made  in  the 
application  for  this  certificate  ahall  be  found  in  any  respect 
untrue,  then  his  or  her  membership  shall  cease,  and  this  cer¬ 
tificate,  with  all  its  agreements  and  guarantees,  shall  be  null 
and  void,  and  in  every  such  case  the  company  shall  not  be 
liable. 

6.  In  case  the  above  membership  shall  cease,  this  certificate 
with  all  its  agreements  and  guarantees  shall  become  null  and 
void,  and  all  previous  payments  made  thereon  shall  be  forfeited 
to  the  company. 

7.  All  members  are  at  liberty  to  travel  by  sea,  lake,  or  river 

by  first-class  steamers  or  sailing  vessels,  and  by  land  to  any 
part  of  the  United  States,  British  Provinces,  or  in  Europe. 
This  certificate  is  not  binding  on  the  company  until  counter¬ 
signed  by - ,  agent. 

In  witness  whereof ,  the  said  National  Life  Insurance  Com¬ 
pany  has  hereunto  affixed  its  corporate  seal,  and  has  caused 
this  certificate  to  be  signed  by  its  president  and  secretary,  in 

the  city  of  Chicago,  State  of  Illinois,  this  — -  day 

of -  A.  I).  1870. 

Now  it  may  be  noted  that  the  conditions  precedent  to  the 
continuance  of  this  certificate  are  two  in  chief. 

First,  The  payment  of  a  sum  certain  in  hand,  and  another 
annually  in  advance,  and  the  payment  of  a  third  sum  in  ir¬ 
regular  equal  installments  as  called  upon  after  the  death  of  each 
member  of  the  same  series  and  division. 

The  fact  that  these  conditions  are  separate,  the  first  in  the 
promissory  part,  or  that  binding  the  company,  and  the  other 
in  that  which  refers  only  to  the  duties  of  the  insured,  is  of  no 
moment,  because  if  this  certificate  were  to  be  adjudicated  upon 
by  a  court,  its  promises,  provisos,  guarantees,  conditions  and 
agreements  would  be  taken  as  a  whole  ;  the  condition  relative 
to  assessments  regarded  as  merely  out  of  place  (with  the  other 
conditions  as  to  payments),  the  signatures  of  the  officers,  stamp 
and  seal  making  it  binding  upon  the  company,  and  the  accept¬ 
ance  of  the  instrument  by  the  insured,  with  his  signature  to  the 
application  making  equally  binding  upon  him  or  her  the  per- 
sonal  conditions  therein  expressed. 

One  of  the  conditions  and  agreements  is  that  the  insured 
A.  will  faithfully  and  promptly  transmit  or  pay  to  the  home  office 
of  the  company  in  Chicago,  within  thirty  days  of  the  date  of  a 
notice  of  a  death  in  his  class,  the  amount  of  his  assessment, 
cp  one  dollar  and  ten  cents,  or,  if  such  payment  is  not  made,  the 
certificate  is  to  be  cancelled. 

The  officers  of  the  company  say  that  when  a  member  dies 
7  the  full  amount  of  the  assurance — in  dollars  equal  to  the  num- 
<  ber  of  memberships — is  paid  him  at  once  after  satisfactory- 
proof  of  loss,  and  that  the  reimbursement  of  the  funds  must 
come  from  the  collection  of  the  assessments.  The  contract  or 


certificate  does  not,  however,  say  any  such  thing.  It  provides 
that  payment  is  not  to  be  made  until  sixty  days  after  the  proof 
of  death,  and  as  the  assessments  are  to  be  made  (or  the  cer¬ 
tificates  of  non-paying  members  forfeited)  within  thirty  days 
after  the  companys  notice  is  dated,  the  true  intent  of  the  cer¬ 
tificate  is  only  to  pay  after  the  assessment  collections  have  been 
made.  In  fact  the  rate  book  of  the  company  says,  in  these 
words:  “One  dollar  collected  on  each  membership  will  be 
paid  over  to  the  person  named  in  the  certificate  of  member¬ 
ship,  and  the  ten  cents  reserved  to  cover  postage  and  other  ex¬ 
penses  of  collecting.” 

Suppose  84,000  members  are  in  this  company,  their  average 
age  being  32  years,  in  42  series  of  2,000  each,  722  deaths*  oc¬ 
cur  during  the  year,  every  member  pays  promptly  his  assess¬ 
ments  of  $17.22  each,  and  the  whole  amount  collected 
$1,444,000  has  been  as  promptly  paid  to  the  heirs  of  the  dead. 
The  vacancies  in  the  classess  have  been  filled  up.  Now  another 
death  occurs  and  100  members  of  one  class  decline  paying  the 
assessments.  The  beneficiary  of  the  deceased  insured,  who 
has  been  prompt  in  paying  the  $17.22  assessed  on  him  to  se¬ 
cure  $2,000  at  his  death,  must  be  put  off  with  $1,900 — $100 
short  of  his  just  dues — or  the  deficiency  must  be  made  up  by 
the  company.  How  ?  I  he  company  answers  promptly,  “out 
of  the  nine  dollars  membership  fees  paid  in  advance  by  these 
100  delinquents.  1  have  said  (upon  the  authority  of  the  rep¬ 
resentative  of  the  company,  at  whose  instance  the  present  dis¬ 
cussion  has  been  hastened,)  that  the  company  regards  the  cer¬ 
tificates  under  review  as  one  year  term  policies.  A  policy  of 
assurance,  for  the  term  of  one  year,  is  that  which  secures  a 
stipulated  amount  if  the  insured  dies  within  one  year  from  its 
date,  its  premiums  (excluding  loading)  is  just  that  with  interest 
which  will  pay  the  “naked  cost;”  and  it  does  not  carry  any 
possible  liability  against  the  company  after  the  expiration  of  the 
period  of  twelve  months. 

On  the  basis  of  the  American  rate,  suppose  that  the  84,000 
persons,  aged  32,  (holding  the  cooperative  certificates,  as  here¬ 
tofore  supposed,)  had,  instead,  taken  onej-ear  term  policies  in 
a  legitimate  life  insurance  company.  They  would  have  each 
paid  in  advance  a  net  premium  of  $16,475,  and  this  sum  im¬ 
proved  at  4)4  per  cent,  interest  one  year,  makes  the  $17.22 — 
the  death  assessment  on  the  cooperative  plan.  The  condition 
of  things,  however,  at  the  end  of  the  policy  year  differs  in  the 
two  cases.  In  the  regular  plan  a  premium  of  $16,476  on  each 
of  eighty-four  thousand  $2,000  policies,  makes  up  a  total  of 
$1,383,945.40.  The  deaths  being  the  same — 723 — require 
$1,446,000,  which  is  the  amount  of  $1,383,945.40  improved  at 
4)4  per  cent. 

The  contract  is  closed.  In  the  first  case  the  heirs  of  722 
dead  members  have  been  paid  in  full,  while  one  assurance  is 
short  $100,  and  the  deficiency  is  to  be  met  out  of  some  other 
fund  than  the  proceeds  of  the  net  term  premiums. 

In  the  second,  the  723  death  losses  have  been  paid  in  full, 
and  there  have  been  no  payments  made  in  advance  or  other¬ 
wise  of  more  than  the  contract  called  for, — “the  naked  cost  of 
insurance;”  no  deficiencies  have  had  to  be  made  up.  The 
company  has  had  no  opportunity  of  putting  down  as  “profit 
on  lapsed  policies”  $1,090  out  of  the  $1,200  advanced  by  the 

[The  condition  that  if  the  money  is  not  received  at  the  home  office,  is  useless  ;  for 
while  the  company  binds  itself  to  notify  its  members  only  by  mail  of  death  losses  and 
never  through  an  agent,  if  the  insured  can  prove  that  he  properly  delivered  his  money 
to  the  post-office  or  handed  it  to  a  charter  officer  of  the  company,  he  can  maintain  his 
interest,  whether  the  “home  office”  ever  got  it  or  not.] 

*  These  high  figures  are  used  for  the  purpose  of  a  comparison  of  illustrations  further 
on.  The  death  rate  is  about  one-half  higher  than  the  company  admits. 


Note. — In  the  copy  before  me  the  annual  dues  are  stated  to  be  $2.00,  but  in  the 
certificate  now  issued,  I  understand  the  amount  is  $2.00  per  $1,000  of  insurance,  or 
$s  oo  on  a  full  membership. 


29667 


4 


WESTERN  INSURANCE  REVIEW. 


January,  1 87  r 


100  members  who,  as  cooperatives,  happened  not  to  pay  their 
last  assessment  for  the  year. 

But,  granting  that  in  the  form  adopted  by  the  National, 
there  is  a  necessity  for  an  advance  payment  to  secure  the 
company,  in  making  good  its  deficiencies,  the  certificate  itself 
shows  that  $1.10  is  sufficient — indeed  all  that  the  company  is 
entitled  to,  and  $10.90  on  each  membership  is  yet  unac- 
couted  for. 

In  real  term  assurance,  as  shown,  no  excess  of  advance  pre¬ 
mium  is  required,  nor  is  any  excess  in  the  advance  premium 
required  in  any  legitimate  plan  of  life  assurance.  That  which 
is  apparent  surplus  in  a  net  whole  life  premium,  over  the  cost, 
during  the  early  years  of  the  policy  is  not  an  excess  of  pay¬ 
ment.  It  is  a  reserve:  it  is  that  sum  which  increased  by  the 
net  premium  annually,  improved  as  compound  interest,  and 
charged  annually  with  the  cost,  will  at  the  probable  end  of 
life,  equal  the  policy’s  face ;  and  is  required  to  make  good  the 
deficiency  of  the  annual  premium  in  the  later  years  of  the 
life,  and  it  belongs  to  that  policy  alone  for  which  the  pre¬ 
mium  creating  it  was  paid.  It  is  not  to  make  good  any  defi¬ 
ciency  in  any  other  policy  of  its  own  grade  or  class,  or  in  any 
other.  Nor  ought  it  to  be  forfeited  if  the  policy  lapses  from 
non  payment  of  premium.  No  company  doing  business  upon 
the  true  theory  of  life  insurance  can  make  a  legitimate  profit  to 
its  proprietors  out  of  any  other  sources  except  excess  of  inter¬ 
est  received  over  basis  rate  and  what  may  be  saved  from  the 
excess  of  loading  over  expenses  and  contingencies.  Savings 
from  mortality,  [fewer  than  the  anticipated  number  of  death 
losses,]  belong  exclusively  to  the  reserves  and  should  be  kept 
secure:  for  if  rates  of  mortality  are  worth  any  thing  at  all,  they 
show  that  any  low  death  rate  in  one  year  or  a  series  of  years 
will  be  inevitably  balanced  by  a  high  one  afterwards.  Hence 
such  profits  should  accumulate  to  be  called  for,  when  the  equili- 
brum  in  the  death  rate  is  restored.  Nor  is  it  out  of  my  line 
of  argument  to  say  that  profit  on  lapsed  policies  is  illegitimate. 
The  reserve  is  an  accrued  present  liability  to  the  policy  holder: 
if  he  keeps  his  policy  alive,  it  accumulates;  if  he  drops  it,  the 
company  dealing  equitably  with  him,  will,  (charging  him 
with  a  moderate  percentage  to  pay  for  replacing  the  risk,) 
carry  the  amount  of  the  reserve  to  expenditures  account  as  a 
surrender  value,  paid,  and  charge-income  with  a  premium  for  a 
paid  up  policy  of  less  amount  fhan  the  original,  or  the  premi¬ 
um  for  a  term  assurance  of  the  whole  amount,  for  a  length  of 
time  that  will  just  exhaust  the  balance  of  the  reserve  in  paying 
cost  of  insurance,  the  latter  course  being  required  by  law  in 
Massachusetts;  and  either,  at  the  option  of  the  insured,  is 
held  good  by  nine  tenths  of  the  companies  now  in  existence. 

But,  whatever  course,  sanctioned  by  custom,  companies  may 
take  in  this  matter  of  the  forfeiture  of  a  reserve  by  the  lapse  of 
a  policy,  no  one  pretends  that  the  reserve  or  any  part  of  it  be¬ 
longs  to  any  other  than  its  own.  That  it  does  not  is  shown  in 
the  fact  that  the  dropping  of  a  policy  out  of  a  company’s  list 
affects  no  other,  all  of  the  reserves  are  maintained,  and  each 
policy,  dead  or  alive,  takes  care  of  itself.  The  National  has 
gone  a  great  way  out  of  the  law  of  common  sense,  as  well  as 
the  laws  of  mortality,  compound  interest,  and  common  arith¬ 
metic,  if  it  is  issuing  a  line  of  policies  for  the  term  of  one  year 
for  a  greatly  excessive  rate  above  what  it  professes,  the  “naked 
eost.”  And  as  its  contract  expressly  contain  a  provision  for  an 
excess  of  payment  over  what  is  just  for  a  term  policy,  we  are 
forced  to  the  conclusion  that  the  company  itself  regards  its  cer- 


cificates  as  policies  of  a  higher  grade  than  term.*  And  being 
more  than  term  policies,  and  an  excess  over  a  just  premium 
having  been  paid  for  them,  can  such  excess  be  treated  as  a  re¬ 
serve  and  so  be  held  to  the  exclusive  use  of  the  policy  or  cer¬ 
tificate  for  which  it  was  paid. 

A  gross  premium  for  any  plan  of  policy  except  Term  policies 
of  one  year  consists  of  three  well  defined  parts: 

jst.  The  reserve — already  described. 

2nd.  The  loading — a  percentage  of  the  net  premium,  to 
pay  necessary  expenses  of  conducting  the  business  and  to  pro¬ 
vide  for  extraordinary  contingencies. 

3rd.  The  “cost  of  insurance,”  which  is  the  probability  of 
dying  during  the  year  multiplied  by  the  amount  at  risk. 

It  is  this  last  part  of  the  premium  which  is  provided  in  com- 
m&n  with  the  premiums  on  all  the  policies  issued  by  a  com¬ 
pany,  to  pay  the  current  claims  under  the  policies  during  the 
year;  sometimes,  however,  an  epidemic  or  other  adverse  con¬ 
tingency,  requiringa  draftupon  the  loading  or  second  part.  But 
the  first  part,  the  reserve,  can  never,  if  a  company  is  managed 
with  reasonable  prudence  be  touched  for  any  purpose  except  the 
final  settlement  of  the  policy  to  which  it  is  credited.  The  Na¬ 
tional  has  the  “cost  of  insurance”  in  its  assessments  of  $1.10 
at  each  death,  although  it  assumes  a  falsely  made  up  rate  of 
mortality.  It  also  has  the  “loading,”  finasmuch  as  it  charges 
an  annual  fee.  of  $5.00  “to  cover  necessary  expenses,”  and  it 
has  a  sum  paid  in  hand,  viz  :  the  $9.00  of  the  membership  fee, 
very  greatly  in  excess  of  the  premium  for  a  term  policy.  The 
company’s  canvassing  documents,  declare  this  payment  to  be 
a  part  of  a  “fund  accumulated  for  the  purpose”  of  meeting  di- 
hciencies  in  amounts  of  insurance  arising  from  failures  to  pay 
death  assessments,  at  the  same  time  guaranteeing  that  the 
current  cost  shall  be  met  by  the  current  death  assessments. 
Perhaps  this  would  be  an  absurd  contradiction  of  items,  if 
there  did  not,  underlying  these  guarantees,  exist  the  expecta¬ 
tion  of  an  event  which  by  the  own  company’s  own  showing  is  a 
certainty.  It  is  that  in  the  course  of  years  variously  estimated 
by  different  computors  at  17  to  34  or  42  years  of  the  class  exis¬ 
tence,  [the  last  the  company’s  own  estimate]  a  time  will  come 
when  by  reason  of  the  advanced  ages  of  the  original  or  older 
members  of  a  class,  the  death  assessments  will  overrun  the  pre¬ 
miums  ordinarily  charged  by  the  mutual  companies,  and  that 
then,  the  deficiencies  by  forfeited  and  deceased  memberships 
cannot  be  replaced  by  new  ones,  and  the  number  of  members 
in  a  class  will  become  so  reduced  that  the  pa)  ments  which  al¬ 
ready  have  been  made  by  old  surviving  members,  who  are 
willing  still  to  remain,  will  have  paid  for  much  more  insurance 
than  they  can  possibly  get,  if  the  amount  is  restricted  by  the 
terms  of  the  contract  to  as  many  dollars  as  there  are  members 
in  the  class.  This  expectation  accounting  reasonably  for  the 
collection  of  $7.90  out  of  the  $9.00  advance  fee,  and  the 
company  claiming  plainly  that  the  aggregate  of  these  fees  is  a 
fund  accumulated  for  such  contingency,  we  must  regard  the 
fee  as  a  reserve,  precisely  like  the  reserve  in  a  regular  company; 
something  to  provide  for  the  claims  of  the  policy  when  the 
cost  part  of  other  current  premiums  hasbecome  insufficient  to 
meet  them.  In  legitimate  life  insurance  that  part  of  the  pre¬ 
mium  paid  which  is  lawfully  used  to  make  up  the  amount  of 

*  That  at  least  an  innate  belief  of  this  sort  exists  in  the  company,  was  made  mani¬ 
fest  by  the  anxiety  of  the  representative  of  the  company,  to  obtain  a  decision  from 
this  Department  upon  the  grade  of  these  policies,  upon  the  cx-parte  evidence  laid  be¬ 
fore  us  by  him. 

t  1  may  observe  here  that  if  these  certificates  are  term  policies,  and  the  death  assess¬ 
ments  of  an  average  of  $10.00  per  annum  make  the  net  premium  $5.00  for  expenses  is 
a  most  monstrous  loading. 


January ,  1 87 1 


WESTERN  INSURANCE  REVIEW, . 


current  death  losses  during  the  year  has  been  explained  to  be 
that  which  is  called  the  “cost  of  insurance,”  so  the  co-opera¬ 
tive  company  provides  that  the  “naked  cost”  to  wit,  the  as¬ 
sessments  of  $i.io  upon  each  death  shall  pay  the  current 
death  claims.  In  the  one,  the  “loading”  pays  the  expenses, 
in  the  other,  the  $5.00  annual  dues  is  declared  to  be  enough, 
and  intended  only  for  the  expense  account.  In  the  first  the  re¬ 
serve  is  known  to  belong  exclusively  to  the  policy  to  which  't 
belongs,  and  in  the  last  (if  the  company  has  not  positively 
provided  that  its  reserve  is  only  to  be  applied  to  the  claims 
of  its  certificate,)  the  law  would  probably  take  cognizance  of 
the  rights  of  the  policy-holder  in  all  the  moneys  to  his  credit, 
and  determine  that  the  reserve  is  his  exclusive  property  and 
must  be  maintained  as  such.  Again,  the  certificate  provides 
that  it  shall  remain  in  force  not  one  year,  but  as  long  as  the 
regular  annual  dues  and  the  death  assessments  are  paid,  ex¬ 
cept  it  terminate  by  the  death  of  the  member.  It  nowhere 
provides  for  a  limited  number  of  payments,  nor  for  a  settle¬ 
ment  of  the  policy  claim  at  the  end  of  a  specified  number  of 
years,  if  the  insured  is  then  alive ;  consequently  it  is  not  a  lim¬ 
ited  payment  policy  of  any  kind,  nor  an  endowment  assurance 
of  any  kind.  Its  further  provision  is  that  if  kept  alive  by  the 
payments  prescribed,  an  assurance  is  guaranteed,  whenever 
the  member  shall  die,  not  within  one,  two,  three ,  five  or  any 
specified  number  of  years,  but  whenever  that  event  shall  oc¬ 
cur.  A  term  policy  always  specifies  the  time  within  which  the 
assured  must  die,  to  make  the  policy  a  claim.  The  net  pres¬ 
ent  value  of  an  ordinary  life  policy  whose  face  value  is  one  dol¬ 
lar  is  R  in  the  equation  R  =  i  ~p~~ •  -r  being  the  age  of  the 

insured  at  the  issue  of  the  policy  and  « ,  the  number  of  years 
which  have  elapsed  since;  and  the  value  of  A  is  determined 
by  the  number  of  premiums  to  be  paid  to  make  good  the  as¬ 
surance. 

In  the  case  before  us,  the  contract  prescribes  no  limit  to  the 
number  of  the  premiums,  except  as  they  terminate  by  death, 
and  as  that  event  must  happen  and  so  stop  the  payments,  they 
are  life  premiums;  and  A  is  the  present  value  of  a  life  annu¬ 
ity  of  $1,  Ajr  is  the  present  value  of  a  life  annuity  at  age  _r  and 
A*  +  n  is  the  value  of  a  life  annuity  at  an  age  x  +  „  years. 
These  annuity  values  are  to  be  taken  from  tables  made  up 
from  the  standard  mortality  and  interest,  provided  in  the  Mis¬ 
souri  law ;  and  have  no  reference  whatever  to  the  actual  or 
probable  amount  of  the  annual  dues  and  assessments  paid  to 
or  required  by  the  company.  The  formula  provides  the  re¬ 
serve  for  a  policy  of  $1.00,  that  multiplied  by  the  amount  of  a 
policy  in  question  gives  the  full  reserve  required  to  be  held  to 
its  credit. 

If  this  argument  is  clear,  it  has  been  shown  : 

That  the  certificates  of  the  National  Life  Insurance  Com¬ 
pany  of  Chicago  are  of  a  higher  grade  than  term  policies  for 
one  year,  or  any  specific  number  of  years. 

That  the  payments  demanded,  and  agreed  upon,  to  keep  a 
certificate  of  membership  in  force,  make  virtually  a  regular 
premium  composed  of  the  three  clearly  defined  parts ;  reserve, 
loading  and  cost. 

That  the  certificates  are  not  limited  payment  life  or  endow¬ 
ment  assurance,  but  that,  by  the  conditions  as  to  the  continu¬ 
ous  payment  of  premium  and  the  time  of  death,  they  are  of 
the  nature  of  whole  or  ordinary  life  policies. 

That  the  amount  of  each,  justly  to  be  considered  is,  under 
the  legal  obligation  resting  upon  the  company  not  to  permit 
forfeitures,  and  its  declaration  that  a  series  once  full  must  be 


5 


kept  full,  as  many  dollars  as  the  number  of  memberships  not 
less  than  1,000  contained  in  the  respective  classes  to  which  the 
certificates  belong. 

I  therefore  recommend  that  all  the  certificates  issued  by  the 
co-operative  branch  of  the  National  Life  Insurance  Company 
of  Chicago,  or  by  any  other  company  which  makes  assurances 
upon  a  similar  plan,  be  valued  in  this  Department  as  of  no 
lower  grade  than  ordinary,  or  whole  life  policies ;  and  that  the 
amount  of  each  be  taken  for  as  many  dollars  as  there  are 
memberships  in  the  class,  at  the  time  of  valuation,  not  less 
than  one  thousand  during  the  first  policy  year. 

The  age  at  issue  should  be,  unless  reported  for  each  certifi¬ 
cate  in  the  detailed  list,  taken  as  the  highest  in  the  class  to 
which  the  certificate  belongs. 

Against  a  reserve  so  determined,  it  will  be  proper  to  allow 
the  company  as  an  asset,  a  “deferred  premium”  viz:  the  differ¬ 
ence  between  the  cost  of  insurance  for  the  year  and  the  expir¬ 
ed  portion  thereof  This  to  be  determined  by  the  Depart¬ 
ment. 

All  regular  policies  issued  by  the  company,  should  be  valued 
according  to  their  expressed  tenor. 

As  this  is  a  question  of  the  very  first  importance  in  view  of 
the  welfare  of  the  people  of  this  State  who  might  be  induced  to 
insure  where  abundant  security  may  be  wanting,  and  feelfng 
that  in  a  multitude  of  counsel  there  is  wisdom,  I  will,  with 
your  consent,  invite  Hon.  William  Barnes,  late  Superintendent 
of  the  Insurance  Department  of  New  York  State,  who  has  had 
a  greater  experience  than  I  have,  in  all  matters  pertaining  to 
life  insurance,  to  consider  the  matters  in  review,  and  lay  before 
you  his  opinion  upon  the  status  of  co-operative  policies. 

Very  Respectfully  &c., 

Aug.  F.  Harvey. 

Actuary. 

- ■  IWI  m  - 

HON.  WILLIAM  BARNES’  OPINION. 

Before  the  Hon.  IVyllys  King  Superbitendent  Insurance  De¬ 
partment,  State  of  Missouri. 

In  the  matter  of  the  application  of  the  National  Life  Insurance 
Company  of  Chicago  Illinois. 

First.  The  legal  obligations  created  against  the  corpora¬ 
tion  by  the  policies  issued  on  the  “co-operative  plan”  are  of 
course  to  be  considered  on  the  debit  side  oftbe  account,  or  un¬ 
der  the  heading  of  liabilities. 

What  are  the  liabilities  which  arise  on  the  issue  of  the  so- 
called  “co-operative  policy?” 

After  a  critical  analysis  of  its  various  provisions,  it  appears 
that  the  following  obligations  are  assumed  on  the  part  of  the 
corporation. 

1.  The  company  agrees  to  constitute  the  policy-holder  “a 
member,”  with  one  or  more  memberships  in  the  company  sub¬ 
ject  to  its  charter  and  by-laws,  and  the  conditions  and  agree¬ 
ments  contained  in  the  poligy. 

2.  The  company  also  “promises  and  agrees”  to  pay  to  the 
beneficiary,  within  sixty  days  after  satisfactory  proof  of  the 
death  of  the  member,  “as  many  dollars  on  each  membership 
held  by  him  as  there  are  memberships  in  his  division  and  series 
at  the  time  of  his  death,  not  exceeding  2,500.” 

3.  And  the  company  further  “guarantees”  that  for  the 
space  of  one  year  from  the  date  of  the  certificate,  the  number 
of  memberships  in  the  division  and  series  shall  not  be  less  than 
one  thousand,  thereby  securing  in  case  of  death  one  thousand 


6 


WESTERN  INSURANCE  REVIEW. 


January,  1871 


dollars  on  each  membership,  and  such  further  amount  as  the 
number  of  memberships  may  exceed  one  thousand. 

What  obligations  are  thereby  created  on  the  part  of  the 
company?  The  first  one  assumed,  that  of  membership,  may 
or  may  not  originate  a  debit,  on  the  part  of  the  corporation, 
and  for  present  purposes  may  be  passed  or  considered  as  noth¬ 
ing. 

The  second  clause  of  the  agreement  on  the  part  of  the  com¬ 
pany  plainly  creates  an  obligation  which  is  called  a  life  policy, 
or  policy  of  whole  life  insurance  on  the  life  of  the  member  des¬ 
cribed  in  the  certificate.  The  promise  is  to  pay  a  certain  sum 
on  the  death  of  John  Doe,  or  within  sixty  days  after  due  proof 
of  death.  This  agreement  is  the  distinctive  substance  and  es¬ 
sence  of  a  policy  for  the  whole  term  of  life,  and  indubitably 
creates  an  obligation  against  the  company  in  the  nature  of  a 
whole  life  policy.  It  should  be  valued  (by  a  gross  valuation)  as 
an  assurance  or  reversion,  payable  at  the  death  of  the  member 
or  policy-holder. 

The  particular  amount  of  this  reversion  or  the  exact  sum  pay¬ 
able  at  death,  is  the  only  element  of  uncertainty  in  the  con¬ 
tract.  If  the  death  occurs  in  one  year,  the  third  clause  in  the 
policy  as  above  set  forth,  provides  that  the  sum  assured  or  re¬ 
version  shall  amount  at  least  to  one  thousand  dollars. 

After  the  members  in  a  division  and  series  reach  one  thous¬ 
and,  this  clause  becomes  in-operative,  unless  the  members 
should,  during  the  year  diminish  below  one  thousand  member¬ 
ships. 

In  valuing  policies  for  the  first  year  if  there  are  less  than  one 
thousand  members,  the  values  of  the  reversions  for  the  exist¬ 
ing  number  should  first  be  computed,  and  to  this  should  be 
added  the  probable  loss  or  single  premium  for  the  year,  on  the 
difference  between  the  actual  number  of  members  and  one 
thousand.  In  other  words,  during  the  first  year  until  the  mem¬ 
bers  and  memberships  number  over  one  thousand,  the  policies 
should  be  valued  on  the  assumed  or  guaranteed  basis  of  one 
thousand  memberships  for  the  first  year;  and  thereafter  on  the 
actual  number,  then  the  query  is— 

What  is  the  present  value  of  the  several  existing  life  rever¬ 
sions,  according  to  the  actual  number  of  members,  and  of  a 
temporary  insurance  for  one  year,  of  a  number  of  dollars  equal 
to  the  difference  between  the  actual  number  of  members  and 
one  thousand? 

After  the  first  year,  the  only  question  as  to  old  policies  would 
be,  What  is  the  present  value  of  reversions  on  the  lives  of  the 
different  members  amounting  to  as  many  dollars  as  there  are 
existing  members  under,  twenty-five  hundred  and  one  in  num¬ 
ber? 

The  valuation  tables  on  inspection  give  these  values  or  single 
premiums  at  the  different  ages.  In  valuing  the  company’s  lia¬ 
bilities  on  this  plan  at  any  time  the  computer  of  course  only 
values  the  existing  policies,  without  any  reference  to  new  mem¬ 
bers  who  may  afterwards  come  in,  or  who  afterward  may  cease 
to  be  members. 

Thus  far  the  debit  side;  In  orper  to  meet  these  enormous 
obligations  what  has  the  company  provided  on  the  credit  or 
asset  side  of  its  contract,  or  otherwise. 

Second.  The  company  has,  as  I  understand  a  paid  up  cap¬ 
ital  of  one  hundred  thousand  dollars  deposited  with  the  auditor 
of  the  State  of  Illinois  for  the  security  of  its  policy-holders. 
This  capital  is  of  course  liable  for  losses,  and  early  losses  would 
thereby  be  abundantly  secured.  But  capital,  of  whatever 
amount,  is  under  an  obligation  to  remain  intact  and  full  with 
only  a  reasonable  margin  of  impairment.  It  cannot  therefore 


be  considered  otherwise  than  as  a  pledge  of  good  faith  in  or¬ 
ganization  and  as  a  temporary  protection  and  security  against 
unusual  or  adverse  contingences.  Capital  being  obliged  in 
the  long  run  to  maintain  its  own  existence,  thereby  exhausts 
its  permanent  power.  It  is  in  the  nature  of  an  army  reserve, 
and  should  be  used  only  in  such  a  way  as  forever  to  preserve 
its  potentiality. 

When  it  is  credited  as  an  asset  and  charged  as  a  liability, 
the  items  balance  each  other.  We  are  therefore  ex-necessitate 
sooner  or  later  remitted  to  the  policy  itself  for  the  pabulum  to 
support  its  own  existence.  What  do  we  find  there?  The 
company  receives  twelve  or  fourteen  dollars  in  cash  for  each 
membership,  on  the  initiation  or  issue  of  each  policy.  This 
amount  having  been  actually  received  and  not  being  return¬ 
able  to  a  member  on  withdrawal,  it  becomes  the  absolute  prop¬ 
erty  and  a  portion  of  the  assets  of  the  company,  and  enters 
unquestionably  upon  the  assets  side  of  the  company’s  state¬ 
ment. 

2.  The  sum  of  five  dollars  is  payable  annually  on  each 
membership  -“during  the  continuance  of  the  certificate. 

3.  The  sum  of  one  dollar  and  ten  cents  is  payable  by  the 
surviving  members  on  each  and  every  membership  held  by  a 
deceased  member  in  the  division  at  the  time  of  his  death. 
It  will  be  noticed  above  that  in  speaking  of  the  values  of  the 
assurances  or  reversions,  I  have  uniformly  refered  to  gross 
values.  This  of  necessity,  for  there  is  no  adequate  net 
premium  or  annuity  to  offset  the  value  of  the  reversion  and  there¬ 
fore,  of  necessity,  the  policy  must  be  disintegrated  and  the 
two  sides  analyzed  and  valued  separately  If  the  obligation 
on  the  part  of  the  assured  or  member,  to  pay  an  annual  prem¬ 
ium  of  five  dollars,  and  the  sum  of  $1.10  on  each  death  in  his 
division  and  series,  was  an  absolute  one  running  concurrently 
with  the  policy  then  I  see  no  good  reason  why  the  company 
would  not  be  entitled  to  be  credited  with  the  present  value 
(after  deducting  a  reasonable  loading)  of  such  annuities  and 
contingent  paymenti  pro  tanto,  as  an  off-set  against  the  pres¬ 
ent  valuesgof  the  assurance  or  reversion.  The  present  value 
of  an  agreement  to  pay  $1. 10  on  each  death  in  a  certain  num¬ 
ber  of  members  of  specified  ages  could  be  calculated  on  the 
legal  standard  of  mortality  and  interest,  and  would  of  course  be 
an  increasing  premium  or  annuity  for  several  years,  until  death 
by  diminishing  the  numbers  would  counteract  the  mortality 
incident  to  increased  ages. 

I  do  not,  however,  see  how  an  optional  obligation  on  the 
part  of  the  member  or  policy-holder,  can  be  properly  offset 
against  an  absolute  and  unconditional  contract  or  obligation  on 
the  part  of  the  company.  By  the  “conditions  and  agreements” 
incorporated  in  the  body  of  the  policy,  it  is  stipulated  and 
agreed  between  the  parties  that  if  the  annual  dues  of  five 
dollars,  and  the  assessment  of  $1,10  on  each  death  are  not 
“received”  at  the  home  office  in  Chicago  when  due,  or  within 
thirty  days  thereafter,  then  the  “membership  shall  cease  and 
this  certificate  with  all  its  agreements  and  guarantees  shall  be 
null  and  void  and  of  no  effect."  All  previous  payments  to  be 
forfeited  to  the  company. 

In  my  opinion,  these  provisions  in  effect,  amount  to  an  agree¬ 
ment  for  liberty  of  withdrawal  to  members  ad  libitum,  and 
no  action  at  law  could  be  maintained  for  the  collection  of  the 
yearly  dues  or  assessments  on  the  decease  of  members.  It  is 
reasonable  to  assume  that  this  right  of  option  on  the  part  of 
the  members,  will  be  exercised  in  their  own  interest,  and  that 
when-mortality  is  heavy  the  number  of  members  will  diminish, 
or  that  the  assessments  will  be  least  available  when  most  need- 


January ,  1871 


WESTERN  INSURANCE  REVIEW. 


7 


ed.  This  leaves  the  first  cash  payment  and  any  other  which 
may  have  been  actually  received,  as  the  only  legal  and  sure 
source  of  income.  Any  other  payment  is  not  an  exigent  ne¬ 
cessity  or  legal  obligation  on  the  member,  and  is  only  tanta¬ 
mount  to  a  voluntary  contribution  or  charitable  donation,  and 
therefore,  not  entitled  to  any  weight  or  value  according  either 
to  the  legal,  scientific,  or  business  promises  which  test  the  sol¬ 
vency  and  status  of  corporate  institutions.  You  will  readily 
perceive  that  the  proposed  so-called  “cooperative  policies,” 
inevitably  lead  to  utter  and  irreparable  insolvency  in  conse¬ 
quence  of  assuming  absolutely,  the  obligations  of  a  life  insur¬ 
ance  company,  without  any  adequate  or  certain  future  premi¬ 
ums  receivable.  As  such,  this  class  of  business  falls  more 
properly  within  the  sphere  and  province  of  friendly,  and  benev¬ 
olent,  benefit  or  burial  societies,  where  voluntary  contributions 
can  betaken  up  or  assessments  made  for  the  benefit  of  deceased 
members  and  their  families.  No  monetary,  provident  or  life 
insurance  corporation,  should  be  allowed  to  issue  life  policies  in 
any  form  or  under  any  pretence  whatever,  without  being  able 
to  maintain  its  proper  reinsurance  fund  or  reserve,  (according 
to  the  legal  standards  of  interest  and  mortality),  invested  in 
sound  legal  securities,  as  provided  by  the  insurance  laws  of  the 
State  of  Missouri. 

(Signed)  William  Barnes, 

Southern  Hotel,  St.  Louis,  Jan.  2d,  1871. 

P.  S.—  I  have  not  considered  it  necessary  to  enter  into  any 
discussion  regarding  the  agreement  endorsed  on  the  back  of 
the  policy  or  certificate  of  membership,  by  which  in  considera¬ 
tion  of  a  certain  additional  sum  for  assurance,  the  company 
agree  to  extenn  meir  guaranty  for  a  policy  of  one  thousand 
dollars,  throughout  the  whole  term  of  life.  W.  B. 


A.  F.  HARVEY  ON  EXCLUSION. 

St.  Louis,  Jan.  7th,  1871. 
Hon.  Wyllys  King,  Supt.  Insurance  Department: 

The  opinion  hitherto  given  as  to  a  mode  of  valuation  of  co- 
operative  certificates,  was  based  upon  the  assumption  that  hav¬ 
ing  complied  with  the  laws  of  the  State,  preliminary  to  a  per¬ 
mission  to  do  business  here,  a  cooperative  as  well  as  any  other 
company  was  entitled  to  a  rule  under  which  to  determine  a 
minimum  for  its  assurance  liabilities;  and  a  reason  was  there¬ 
fore  given  for  fixing  the  lowest  possible  grade  to  its  contracts  of 
assurance,  to  wit :  ordinary  life  policies.  Permit  me  further, 
however,  to  suggest  the  inquiry,  whether  the  character  of  com¬ 
panies  of  this  kind  in  review,  is  not  in  the  language  of  the 
Missouri  laws,  “such  as  to  render  their  further  proceedings 
hazardous  to  the  public,”  and  if  so,  whether,  even,  after  a  valu¬ 
ation  of  the  certificates  upon  an  ordinary  life  grade,  they  shall 
exhibit  assets  enough  to  secure  present  solvency,  they  should 
not  be  excluded  from  doing  business  in  the  State,  upon  the 
general  ground  that  the  future  as  well  as  the  present  welfare  of 
the  citizens  of  Missouri,  should  be  taken  cognizance  of  by  the 
department. 

The  testimony  of  such  distinguished  State  superintendents 
as  the  Hon.  Messrs.  Barnes,  Miller,  Sanford  and  Clark,  and  of 
Hon.  Elizur  Wright,  D.  P.  Fackler  and  E.  W.  Bryant,  Esqs., 
and  other  eminent  (and  honest  as  well  as  eminent)  actuaries,  is 
a  unit  in  their  opinion  that  all  cooperative  companies,  conduct¬ 
ed  upon  the  plan  common  in  the  United  States,  must  sooner 
or  l^ter  come  to  grief.  Indeed,  every  one  is  born  of  a  diseased 
parentage,  and  is  brought  into  the  world  covering  the  ineradi¬ 
cable  seeds  of  sure  and  early  dissolution. 


One  of  the  fundamental  principles  of  safety  (to  assurer  and 
insured)  in  life  insurance,  was  the  equalization  of  periodic  pre¬ 
mium  payments  between  the  ages  at  entry  and  possible  termi¬ 
nation.  At  the  very  beginning  of  the  science  of  life  contin¬ 
gencies,  it  became  evident  that  no  matter  how  cheaply  insur¬ 
ance  could  be  guaranteed,  and  how  well  able,  desirous  and  wil¬ 
ling,  men  might  be  to  secure  it  by  paying,  say  annually,  only 
the  cost,  by  a  premium  increasing  but  slightly  during  the  early 
years  of  life,  it  would  be  practically  impossible  to  retain  mem¬ 
bers  in  the  companies,  when  by  reason  of  advancing  years  this 
“slight”  increase  had  changed  to  an  almost  geometrical  ratio, 
and  made  the  premium  a  burden.  And  there  is  no  truth  in 
life  insurance  more  positively  demonstrated  than  that  the  expe¬ 
rience  of  all  the  companies — towards  a  thousand — which  have 
operated  within  a  century,  has  only  proven  the  justice  and  wis¬ 
dom  of  the  principle  of  specific,  equal,  periodic  premiums, 
in  which  the  current  cost  of  insurance  at  least,  is  invariably 
provided  by  cash  in  advance — the  only  equitable  modification 
thereof  being  an  annually  decreasing  rate,  as  adopted  by  some 
companies.  It  is  upon  the  reversal  of  this  principle  that  the 
cooperatives  base  their  claims  to  business.  While  a  regular 
company  offers  an  assurance  of  $1,000  for  a  premiun  of  $25, 
to  be  paid  annually  during  life — that  is,  $25  at  the  age  of  entry, 
say  twenty-five,  and  then  only  $25  ayearat  the  ages  thirty,  thirty- 
five,  forty,  &c.,when  the  policy-holder  is  active  and  in  the  pro¬ 
ducing  years  of  life,  and  not  a  cent  more  when  he  reaches  eighty, 
eighty- five  or  ninety  years  ;  the  cooperative  insurer  says  it  is  eas¬ 
ier  to  pay  $5  at  the  age  of  thirty,  $6  at  the  age  of  thirty-five,  $7  at 
the  age  of  forty,  and  so  on  up  to  $80  at  the  age  of  eighty,  $150 
at  the  age  of  eighty-five,  or  $300  at  the  age  of  ninety,  when  the 
insured  is  enfeebled  by  old  age  and  dependent  upon  friends  for 
his  means  of  payment.  The  impossibility  of  realizing  the  ease 
of  such  payments  is  apparent.  And  the  assumption  that  assur¬ 
ances  will  be  maintained  (by  the  payment  of  an  increasing 
premium)  through  life,  is  utopian  if  nothing  worse;  I  confess 
I  think  it  worse.  The  cooperatives  charge  the  regular  compa¬ 
nies  with  pocketing  the  profits  on  lapsed  policies.  Perhaps 
some  do.  The  cooperative  provides  for  no  surrender  value  to 
his  certificates,  for  no  extension  of  a  policy,  for  no  dividends, 
no  return  premiums ;  but  knowing,  if  he  knows  anything  about  f 
the  matter  at  all,  that  a  policy  upon  a  continuous  premium  o 
constant  increase,  never  was  kept  alive  any  considerable  num¬ 
ber  of  years,  and  that  it  is  practically  impossible  that  one 
should  be;  he  not  only  indirectly  in  theory,  but  does  in  as  many 
words,  in  his  practice,  provide  for  an  absolute  forfeiture  of  all 
payments  to  and  interest  in  the  company,  so  soon  as  the  insured 
makes  default  in  one  death  assessment  of  $1,10.  Utopian  is 
hardly  the  name  for  the  idea  at  the  root  of  the  matter;  called 
by  another  and  better  name,  it  might  involve  an  idea  of  a  jury 
impaneled  to  convict.  The  member  may  pay  his  $45  for  four 
memberships,  $20  for  first  annual  dues,  and  $23  for  death 
losses  during  eleven  months;  yet  under  the  contract  issued  to 
him,  if  in  the  twelfth  month  he  should  fail  to  see  that  his  as¬ 
sessment  for  a  loss  occurring  then,  reaches  the  “home  office  of 
the  company,”  and  should  then  die,  his  widow  will  be  without 
the  $2,500  he  supposed  he  had  provided,  and  his  $88  will  have 
“gone  where  the  woodbine  twineth."  But  if  he  shall  live  and 
continue  a  member  over  one  year,  pay  his  annual  dues  at  the 
beginning  of,  and  his  death  assessments  of  $24  during  the  sec¬ 
ond  year  and  then  die,  the  accruing  benefit  to  his  heirs  may  be 
just  what  the  contract  calls  for, — four  dollars  from  each  other 
member  who  pays — and  there  may  be  a  thousand,  a  hundred, 
a  dozen,  or  none.  If  the  last,  the  widow  has  no  remedy  what- 


8 


WESTERN  INSURANCE  REVIEW. 


ever.  Indeed,  a  case  in  point  recently  occurred,  where  a  ben¬ 
eficiary  of  over  a  year’s  standing  in  a  cooperative  company,  re¬ 
ceived  as  full  payment — where  $2,500  was  expected,  the  sum 
of  $86. 

Again,  in  regular  companies,  their  solvency  at  present,  and 
ability  to  meet  existing  obligations  maturing  hereafter,  depends 
wholly  upon  the  money  which  has  been  paid  in.  In  the  co-op¬ 
eratives,  present  solvency  depends  upon  the  amount  of  paid  up 
capital  held  intact,  while  their  ability  to  meet  future  liabilities 
upon  existing  obligations,  depends  wholly  upon  money  which 
may  or  may  not  be  paid  them  after  their  liabilities  accrue. 
These  are  conditions  of  extreme  difference.  The  St.  Louis 
Mutual  with  16,000  policy-holders,  could  lose  half  of  them  by 
declination  to  pay ;  and  yet  the  company  could  carry  the  insur¬ 
ance  on  the  lapsed  policies  until  the  cost  exhausted  their  respec' 
tive  surrender  values,  and  its  ability  to  pay  accruing  obligations 
on  the  remaining  8,000,  would  scarcely  be  disturbed.  But  if 
a  co-operative  company  with  5,000  members  were  to  lose  half 
of  them  by  default  of  payment,  its  ability  to  pay  what  the  re¬ 
maining  2,500  had  paid  their  money  to  secure,  would  be  im¬ 
paired  precisely  fifty  per  cent;  and  the  heirs  of  the  last  mem¬ 
ber  filling  a  class,  who  had  invested  in  good  faith  his  money 
for  the  purpose  of  receiving  $2,500,  (as  many  dollars  as 
there  were  members  in  the  class  when  he  entered)  must  be 
deprived  of  $1,250  of  what  they  are  honestly  entitled  to,  if  he 
delays  his  dying  until  after  the  2,500  have  defaulted.  That 
such  a  condition  of  things  may  happen,  is  not  a  violent  pre¬ 
sumption  ;  it  would  be  a  fact  in  a  cholera  season. 

The  co-operatives  anticipating  the  assumption  of  extreme  pos. 
sibilities  by  those  who  inquire  into  their  character,  triumphant¬ 
ly  point  to  the  fact  that  there  are  no  data  upon  which  to  base 
them.  Doubtless  this  is  true,  and  it  is  also  quite  as  true,  that 
no  company  of  the  kind  has  ever  lived  long  enough  to  demon¬ 
strate  its  own  theory.  They  are  like  balloon-framed  buildings 
erected  in  a  bog;  adverse  winds  destroy  the  superstructure  be- 
iore  the  weakness  of  the  foundation  is  proved. 

But  the  cooperatives  rest  their  claims  to  recognition  in  the 
United  States,  in  a  great  measure,  upon  the  ground  that  simi¬ 
lar  associations  exist,  do  successful  business,  and  are  protected 
by  law  in  England.  This  is  true  only  in  part.  All  lodges  and 
societies  having  charter  or  by-law  provisions  for  post  mortem 
benefits  in  bonusses  or  burial  fees,  or  which  provide  for  relief 
in  cases  of  sickness  or  accident — co-operative  educational,  clo¬ 
thing,  provision  and  coal  companies,  all  mutual  aid  societies ; 
some  30,000  in  number,  are  regulated  by  what  is  called  “The 
Friendly  Societies  Act,”  a  copy  of  which  I  have  before  me. 

I  n  it  are  several  wholesome  provisions  : 


January,  1871 

First.  No  post  mortem  benefit  or  bonus  (assurance)  is  per¬ 
mitted  to  exceed  £30,  and  no  burial  fees,  f\o. 

Second.  Every  member  can  by  legal  process  be  compelled 
to  pay  his  dues  —generally  specific  sums  at  regular  periods. 

Third.  No  compensation,  (beyond  a  stipend  to  a  chairman, 
secretary  or  treasurer),  is  allowed  for  carrying  on  the  business, 
and  none  whatever  for  soliciting  or  procuring  memberships. 

Fourth.  No  part  of  the  funds  go  to  the  stockholders  as 
profits,, but  all  accumulations  belong  to  the  general  body,  share 
and  share  alike;  and  no  dissolution  of  a  society  and  distribu¬ 
tion  of  its  funds  among  the  members  can  take  place,  without 
the  consent  over  the  written  signature  of  nine-tenths  of  those 
interested.  And 

Last,  (but  first  in  importance).  No  such  association  can  be 
permitted  to  do  any  business,  until  copies  of  its  charter  and 
rules  are  filed  with  a  government  office) ,  and  its  tables  of  rates, 
fees,  assessments  or  premiums,  are  certified  to  as  sufficient  for 
the  purposes  proposed,  by  the  actuary  to  the  commissioners 
for  the  reduction  of  the  public  debt;  or  by  an  actuary  to  a  life 
insurance  company  of  five  years  respectable  standing. 

Any  one  of  these  provisions  would  be  fatal  even  to  the  par¬ 
turition  of  a  co-operative  company  here;  and  it  appears  to  me 
that  the  legislature  now  in  session,  might  wisely  add  to  our 
present  laws  a  section  or  two  embodying  some  of  the  above  fea¬ 
tures,  or  others  which  would  better  protect  the  people  from  the 
blandishments  of  a  cheap  insurance  system  ;  in  which  as  in 
a  ready-made  clothing  shop,  the  cheaper  the  goods,  the  more 
likely  they  are  to  be  shoddy. 

Upon  *  Ire  whole,  permit  me  10  sajgcot  -oF.-n  111c  grounds 
that  the  mathematical  or  scientific  principles  (if  any)  upon 
which  these  companies  base  their  plans  of  premium  payments, 
have  not  been  demonstrated  by  any  competent  authority  to  be 
sufficient,  (if  not  conclusively  proved  by  the  failures  of  a  score 
of  similar  companies  to  be  unsound),  and  that  the  probable  as 
well  as  possible  result  of  such  unproven  principles  in  practice, 
will  be  “such  as  to  render  their  further  proceedings  hazardous 
to  the  public,”  that  all  co-operative  insurance  companies  which 
seek  to  do  a  public  business  by  general  advertisement,  or  by 
employing  persons  compensated  by  salaries  or  commissions  to 
solicit  memberships,  ought  to  be  excluded  from  the  State,  at 
least  until  laws  are  enacted  which  will  more  effectually  protect 
those  who  are  willing  to  insure  in  them. 

Very  Respectfully,  &c., 

Aug.  F.  Harvey,  Actuary. 


THE  NATIONAL  LIFE  INSURANCE  COMPANY  OF  CHICAGO  applied  to  the  Insurance  De¬ 
partment  of  New  York  to  do  business  in  that  State,  and  the  Superintendent  DECLINED  the  application,  upon 
the  ground  of  the  CHARACTER  of  their  business,  and  the  forms  of  their  policies  being  such  as  render  it 
PRACTICALLY  IMPOSSIBLE  for  that  Department  to  estimate,  with  any  reasonable  degree  of  certainty,  its 
liabilities.  —  [EDITOR  OF  VV.  I.  R. 


